2 Ways to Put Your Children's Money to Work

2 Ways to Put Your Children's Money to Work

Recently I've been sharing tax strategies related to getting your children in the game and on your payroll. Now that you've put your children to work, the next step is to put their money to work!

There are many ways your children can put their money to work. Here are two of those ways:

#1 Have Your Children Pay for Their Extras

One thing most parents agree on is that children can be expensive! All the extras add up - sports, lessons, toys, games, the latest gadgets. All parents know this list can go on and on. Rather than paying for your children's extras with your after-tax dollars, have your children pay for their extras with their after-tax dollars. Your children's after-tax dollars are much cheaper than yours - especially if they are in a 0% tax rate!

What I love about this strategy is it reduces my taxes AND gives my children real life experience with managing their own finances.

#2 Have Your Children Fund a Roth IRA

Typically children do not have IRAs because in order to make a contribution to an IRA, the IRA owner must have earned income. Since most children do not have earned income, an IRA is not an option.

When you have your business hire your children, not only do you have the opportunity to reduce your taxes, but you have also created the opportunity for your children to contribute to an IRA. Once your children have earned income, they are eligible to contribute to an IRA.

In most cases, I find that a Roth IRA is a better fit for children than a traditional IRA. One reason is because distributions from a Roth IRA are tax-free. In a traditional IRA, distributions are taxable income. This means that all the income earned in a Roth IRA will never be taxed! Of course, the rules of the Roth IRA must be followed to receive this treatment but I find that most of the time, the rules of the Roth IRA are easier to follow than those of a traditional IRA.

The power of time is huge in this strategy because even modest contributions to a Roth IRA at a young age can grow to a substantial balance by the time your children are even just middle aged! Add to that the tax-free nature of the Roth IRA and it's easy to understand why this strategy can be so powerful for your children.

Another reason I like the Roth IRA for children is that there are several exceptions to the early withdrawal penalty (which can make Roth IRA earnings and contributions taxable). These exceptions provide opportunity for your children to take distributions without penalty long before they reach retirement age.